A new cycle begins in 2023, driven by factors such as a weak economic recovery, ship replacement, geopolitical conflicts, and stricter environmental policies. It is expected that the global GDP will have a compound annual growth rate of approximately 3.1% from 2021 to 2025, with a global GDP growth rate of 6.2% in 2021.
From the above, it is evident that the long cycle of the shipping industry is driven by economic growth and changes in manufacturing capacity; the medium term is driven by supply and demand patterns and replacement cycles; and the short term is affected by transportation efficiency, with the current period being in the first half of an upward cycle.
Long cycle: Over the past century, there has been a positive correlation between ship deliveries and economic fluctuations. The global GDP compound growth rate of 3.1% from 2021 to 2025 is relatively weak compared to the previous downturn, which has driven the start of a new shipbuilding delivery cycle in 2023.
Medium cycle: On the demand side, since 2021, ships have entered a peak period of replacement demand release; on the supply side, global shipbuilding capacity has been significantly reduced since 2008. Under the mismatch of supply and demand, the new ship price index has been continuously increasing since 2021.
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Short cycle: Fluctuations in transportation efficiency directly affect freight rates and stimulate ship demand. Historically, the closure of the Suez Canal on two occasions has led to an increase in ship deliveries. Pandemics, trade protectionism, and even geopolitical conflicts have all led to a decrease in shipping efficiency and stimulated ship demand. In addition, the shipping industry is facing stricter environmental regulations, and the reduction in the size of environmentally compliant fleets is expected to stimulate the demand for alternative fuel ships.
The shipbuilding industry has become concentrated in China.
The global shipbuilding landscape is concentrated, with China leading the world in shipbuilding.
In global shipbuilding, China, Japan, and South Korea form a tripartite stand, and since 2008, the combined global market share of new orders from these three countries has exceeded 90%. In recent years, the share of orders received by Chinese shipyards has steadily increased. From January to July 2024, China's shipbuilding order share reached 72.63% (in terms of deadweight tonnage), an increase of 8.03% from 64.60% at the end of 2023; the share in terms of value reached 58.78%, an increase of 4.38% from 54.40% at the end of 2023. China's global share in shipbuilding continues to rise. From January to July 2024, China's shipbuilding delivered orders of 30.5 million deadweight tons, accounting for 56.68% of the global share, an increase of 4.31% from the end of 2023; by the end of July 2024, China's shipbuilding had orders of 180 million deadweight tons on hand, accounting for 60.68% of the global share, an increase of 9.19% from the end of 2023. From January to July 2024, China's shipbuilding completions, new orders, and orders on hand all ranked first in the world.
Currently, the global shipbuilding industry is mainly a competition between China and South Korea. As the cycle evolves, China's share will continue to increase. However, the shipbuilding industry remains a pillar industry for South Korea, and they will definitely focus on maintaining this industry. South Korea's high-end ship types will not easily exit the market. According to the situation of the shipyards, one takes the stage after another, especially in the case of LNG carriers.
During the last cycle's bull market, a large amount of capital and enterprises entered shipbuilding, but later encountered rigid de-capacity. Participants in this cycle are more cautious. The main factors influencing this cycle are fivefold: normal ship replacement; backfilling - from 2013 to 2020, China's order volume was below the normal level; decarbonization of the shipping industry leading to the accelerated replacement of old ships with new energy ships; geopolitical situations have lengthened shipping routes and reduced capacity, increasing the demand for ships; and the restructuring of the global industrial landscape, with Chinese enterprises going global and the reshoring of manufacturing to the United States.From the supply side perspective, the last cycle saw a disorderly expansion of production capacity. In this cycle, shipyards have already decreased by half. There is still hope for the continuation of this ship cycle, with the quality and high-end level of ship types being much higher than in the last cycle. The complexity coefficient for manufacturing ships was 0.2 in the last cycle, and it is 0.4 in this cycle.
Looking at the investor communication minutes released by China State Shipbuilding Corporation (CSSC), this shipbuilding cycle sees a simultaneous increase in quantity and price, with shipyards having a long queue of orders on hand. The ship price index may still rise further. Compared to the last cycle, the orders on hand are characterized by "two more, one lower": more down payments, more high-quality customers, and a lower proportion of speculative orders. The company believes that the trend of this ship market may exceed everyone's expectations.
CSSC excels in scale and has a diverse ship type structure, being a leading global shipbuilding enterprise. In 2023, the revenue from shipbuilding, repair, and offshore engineering accounted for 94%, covering various types of military and auxiliary ships, as well as civilian ship types such as bulk carriers, oil tankers, container ships, large cruise ships, and various special-purpose ships. Benefiting from the upward cycle, the shipbuilding price continues to rise, and the company's profitability has significantly improved. In 2023, the company's gross margin was 10.57%, and the net margin was 3.95%, increasing by 2.49 and 2.57 percentage points respectively compared to 2022. In 2023, the company achieved a net profit attributable to the parent company of 2.957 billion yuan, a year-on-year increase of 1614.73%. The 2024 semi-annual report shows that the company's revenue was 36 billion yuan, achieving a net profit of 1.412 billion yuan, with a net margin of 4%.
Therefore, the company's profit margin is still relatively low. It is clearing low-priced ship orders from the first half of 2021, such as the delivery of cruise ships from the previous year and the disposal of offshore platforms in 2023, which together amount to nearly 10 billion yuan. From a gross margin perspective, the company's performance in 2024 will be lower in the first half and higher in the second half. The company estimates that the proportion of relatively high-priced ships is 2/3. The first half of 2024 is mainly clearing low-priced ships, and the ship price is still rising. Steel and exchange rates are currently in a good state, and the company is confident that future profits will definitely be released, with a positive trend.
CSSC's stock price has nearly quadrupled from its bottom. In the last cycle, the company's profit margin reached 20%. According to the company's description of a larger, longer, and more high-end new cycle, can CSSC's profit margin reach 30% in this cycle?
In the context of a large cycle going up, make bold assumptions and carefully verify. As of July 2024, the global new ship price index reached 187.98, a year-on-year increase of 9.05%, a month-on-month increase of 0.40%, an increase of 5.39% compared to the beginning of 2024, and an increase of 50.31% compared to the bottom in 2020. At the same time, on the cost side, steel prices have continued to decline since 2022. As of July 2024, the average price of 20mm shipbuilding plate in Shanghai was 3,976 yuan/ton, a year-on-year decrease of -11.47%, and a month-on-month decrease of -4.88%. The gap between ship prices and steel prices continues to widen. The shipbuilding price index and the steel price gap are worth focusing on in the future.
In terms of private enterprises, Yangzijiang Shipbuilding, listed in Singapore, is an excellent representative of private enterprises.
In the first half of 2024, Yangzijiang Shipbuilding's total revenue increased by 15.3% year-on-year, reaching 13 billion yuan, of which the core shipbuilding segment contributed 95.0% to total sales; the net profit attributable to shareholders soared by 77.2% year-on-year, reaching 3.1 billion yuan. We have to marvel at the huge operating leverage of the shipbuilding industry (a double-edged sword), with the net margin increasing by 8.2% to 23.4%, and the net margin is only 3% lower than the gross margin. In the first half of 2024, Yangzijiang Shipbuilding achieved 79 new orders, valued at 8.48 billion US dollars, completing 188% of the annual new order target. Among these new orders, 79% belong to clean energy ship types, including 12 gas carriers, 18 LNG dual-fuel ships, and 17 methanol dual-fuel ships. In terms of ship delivery, Yangzijiang delivered a total of 37 new ships, achieving 59% of the annual target of 63 ship deliveries.
Yangzijiang Shipbuilding's order backlog has reached a new high, with 224 ships valued at 20.15 billion US dollars. The order backlog has a rich ship type structure, including 89 container ships, 47 bulk carriers, 24 gas carriers of various types, 64 oil tankers, and the proportion of clean energy ship types accounts for about 70% of the total order volume.
The company's balance sheet is healthy, with net cash of 16.15 billion yuan and financial assets of 1.3 billion yuan. The company resumed expansion in 2021, increasing fixed assets by more than 2 billion yuan over three years, currently reaching 7.8 billion yuan. Due to the company's profits reaching a historical high of 4.1 billion yuan in 2023, the return on equity (ROE) has increased to 21%, and it is maintained at around 10% during the low tide period. The company's asset quality and profitability are excellent.Therefore, the company also looks optimistic, with the order volume on hand, "making the profitability visibility forecast to mid-2028." In the future, it will "continue to expand production capacity to keep up with the strong demand for clean energy ships and develop LNG terminal business to provide a stable cash flow."
Yangtze River is known as "China's most profitable shipyard". The profit of Yangtze River's semi-annual report is about twice that of China Shipbuilding, while the revenue is only about one-third of the latter. This efficiency gap, from the financial report, is more due to China Shipbuilding's involvement in military and other ship types, while Yangtze River is a private enterprise aiming for maximum profit. It can be seen from the order on hand that 70% are clean energy ship types with higher profitability. Even during the industry's low point, Yangtze River's profit margin is still 12.2%, with a high point of 25.1% in 2011, and there is still room for improvement. After all, in July, the global ship price index rose by 9%, while the ship plate price fell by 11% and decreased by 5% month-on-month. The difference between ship prices and steel prices is the highest in 28 years.
Yangtze River's market value in the Singapore market is about 55.6 billion yuan, with net cash on hand of 16.1 billion yuan, and it is estimated to earn 7 billion yuan for the whole year, with a price-earnings ratio of about 8 times. The stock price has just exceeded the 2007 high point and set a historical high. Compared with China Shipbuilding, Yangtze River's valuation is cheaper.
It is worth noting that Yangtze River has 1.3 billion yuan of financial investment business on its books. However, the company has maintained a stable dividend for so many years, which is popular with investors.
Moreover, the company's stock price has always risen with performance, and there has been no valuation bubble at this stage.
The industry's production capacity has begun to expand again
Against the backdrop of the recovery of the global new shipbuilding market in recent years, China and South Korea's shipbuilding industries have taken completely different development paths. After experiencing the rapid expansion of the ship market during the boom and the subsequent depression, South Korea's major shipbuilding enterprises have focused more on quality growth. Even if they increase investment, they cannot simply increase production capacity, but enhance competitiveness by updating old equipment, developing environmental protection technology, and building smart shipyards.
In June 2022, there were 153 active shipyards in Asia; by June 2023, the number had increased to 180. In particular, China's private shipbuilding enterprises are actively expanding production capacity through large-scale investment, with an investment of more than 10 billion yuan, in order to win more new ship orders in the future.
Yangtze River Shipbuilding plans to invest 3 billion yuan in the next two years to build the Yangtze Hongyuan Green High-tech Clean Energy Shipbuilding Base Project. The project will build a 300,000-ton shipyard, a 200,000-ton fitting wharf, a 100,000-ton harbor pool, with an annual production capacity of about 800,000 deadweight tons, and is expected to be completed and put into operation by the end of 2026.
New Era Shipbuilding has also launched the largest expansion in recent years, investing 5 billion yuan to build a new energy ship intelligent manufacturing project. Currently, the construction of the new dock will start, and after completion, New Era Shipbuilding will have 4 dry docks, which is also the second expansion of the company since adding docks in 2005.After Hengli Group took over the assets of STX Dalian, the newly established shipbuilding company Hengli Heavy Industry plans to invest 9.2 billion yuan to expand its construction capabilities for VLCCs, VLGCs, large container ships, FPSOs, and high-value marine engineering equipment. After the expansion, Hengli Heavy Industry's annual shipbuilding capacity will reach 7.1 million tons. At the same time, Hengli Heavy Industry also plans to invest an additional 2 billion yuan to build supporting industrial parks.
These capacity expansions during high-growth periods are also a common issue in the strong cyclical industries in China. Currently, there is no concern about overcapacity before 2027. The shipbuilding industry is quite complex, with different types of ships (dry bulk, chemical, or LNG), and the price of the ships themselves must follow the cycle and rental fluctuations, as well as global trade volume, so investors need to closely track these factors.